LTC needs some TLC; opinion: sluggish sales of long-term-care insurance can be transformed with a simple "kiss". (Life/Health: Long-Term-Care Insurance).

Following conventional logic, long-term-care insurance should be experiencing growth of fairy-tale proportions. Instead, it is the industry's ugly frog sitting in its own little pond, just waiting for some magic to unleash its transformation.

Market demographics suggest that consumers should view the purchase of long-term-care insurance as a necessity; not an option. The aging of America is apparent in the phenomenal increase in the population of those over age 65. Costs for long-term medical care are increasing, even as the government is reducing its expenditures on health care. People now linger for years with debilitating illnesses. If senior citizens worry about anything, they worry about running Out of money. And nothing can spend money faster than a long-term illness--with the high cost of care and prescription drugs.

It's projected that more than half of all people living today will suffer a long-term, debilitating illness that will require nursing-home, assisted-living or in-home health-care services. Therefore, it seems logical that consumers would be lining up to buy long-term-care insurance.

And yet, long-term-care policy sales are languishing in the backwaters of the insurance industry. Most companies don't even offer the product. Market penetration for long-term-care coverage is less than 7%. Fewer than 5,000 agents market long-term-care insurance as their primary product. Most agents view it, at best, as an afterthought in the sales process. Industry sales of long-term-care insurance barely creep forward each year.

When all facts suggest that long-term-care insurance should be a top seller, why does it remain the industry undesirable? The answer is not all that bewitching.

The long-term-care industry has meandered its way through 25 years of product development so that today, no one--not the companies, agents or even the consumer--can understand the product. There are no real industry leaders or standards that can be relied on to point the way to achieving market potential. The bottom line is that the long-term-care products offered today are too complicated and confusing to be successful. The curse of complexity left long-term-care insurance with an unsightly burden that made it unattractive to many would-be consumers.

The product needs a magic spell to transform its position in the industry. Market potential for long-term-care insurance will be realized only after the industry recalls the most powerful incantation--"keep it simple, stupid!" (Pucker up, Frog Prince, for your "K.I.S.S.")

Strange Brew

It took a lot of effort and time to make long-term-care insurance as complicated and confusing as it is today. In the early days, with no experience to rely on, companies were uncertain how to price the product. To counter this dilemma, the companies developed products that allowed them to underwrite and manage claims at the time of a claim, instead of at issue. To do this, policy language had to be obtuse and open-ended. This process invited confusion, which was the objective.

When policyholders began to complain about not receiving the benefits promised in the policy, state regulators stepped in to "correct the abuses." While the intent was well meaning, regulators only made the situation worse. The idea was to protect the consumer by mandating minimum benefits in every policy, regardless of whether the benefits were needed. And of course, each state had its own idea as to which benefits should be mandatory.

About the same time, the companies decided that the best way to camouflage product pricing and create an illusion of innovation was to begin adding "baubles and bangles" to the product. Each time a new long-term-care policy was introduced, it became an alchemy of policy provisions, including the mandates of the regulators, the baubles and bangles offered by competitors and a whole set of new benefits. And so it went for years. As a result, long-term-care policies have become so covered with adornments that it's difficult to see the policy through all the clutter.

There is hope, however. We can develop long-term-care products that will allow the industry to tap the market potential. Two inviolate rules should be mandated to ensure that the product is simple. First, the entire policy should be able to be explained in no more than two letter-sized pages. Second, even an actuary should be able to explain the policy in fewer than 10 minutes. If these two criteria are met, the policy will assuredly be simple enough to sell.

Product design also must answer the needs to be met. Consumers are concerned--after a lifetime of hard work accumulating assets to assure a comfortable retirement or to pass on to heirs--that the result of their life's toils will be wiped out by a long-term debilitating illness. The most valuable asset one can have when serious illness strikes is cash to pay for the cost of care.

Keeping It Simple

So why not develop a long-term-care policy that pays the insured a set amount of cash at the onset of illness? Think of it as "senior disability income." All the qualifications, limitations, confusion and high costs of current long-term-care policies could be replaced with a simple monthly cash payment. Once benefits have been triggered, the insured would receive $1,000 to $5,000 per month, or more. For the first time, the insured, not the company, would decide how the benefits are distributed.

Instead of selling a confusing long-term-care policy, insurers could offer a simple long-term-cash policy.

There is another approach to selling long-term-care coverage that could be employed. It's an approach that has been used to encourage life insurance sales. Term insurance was developed as a simpler, less expensive alternative to whole life insurance. And even though term insurance offers fewer ancillary benefits than whole life insurance, it fulfills the fundamental need of protecting against the economic loss caused by death.

Likewise, a term long-term-care policy could offer a simpler, less expensive alternative to the confusing, expensive policies offered today. The policy could be a simple, basic benefit to pay for nursing-home, assisted-living and home health care. Waiting periods would be extended, and benefits could be limited to five, 10 or 15 years. The result would be a simple, easy-to-explain policy that meets the fundamental needs for long-term-care coverage. And, it would do so at a significantly lower premium than current policies. Calling the product "term" doesn't mean it is not a permanent policy; it would refer to the fact that it's simple to understand, underwrite and market.

Of course, for such a product to be viable, agents would have to move from selling baubles and bangles off a spreadsheet and get back to selling solutions for real-life needs. And regulators would have to recognize a new type of policy and waive the unnecessary mandates that clutter today's long-term-care contracts-just the way term life insurance does not have to meet the regulatory mandates of whole life insurance.

The need for long-term-care insurance presents the insurance industry with a unique and potentially lucrative market opportunity to meet a valid, recognized consumer need. The need is simple, and the solution should be, too. If companies will stoop to "kiss" long-term-care insurance's ugly frog exterior by offering simple policies that add real value, then the long-term-care market just might become the handsome prince of growth for the industry.

Robert W. MacDonald is president of CTW Consulting LLC. A 37-year veteran of the insurance industry, he recently retired as chief executive officer of Allianz Life of North America.